What Russia's Failing Economy Means For Putin's Legacy And Military Ambitions

The WorldPost spoke with Sergey Aleksahenko, former deputy chairman of the Russian Central Bank.

Every week, The WorldPost asks an expert to shed light on a topic driving headlines around the world. In this edition, we speak with Sergey Aleksashenko, former deputy chairman of the Central Bank of Russia and a nonresident senior fellow at Brookings Institution, about the national and international implications of Russia's weakening economy.

Russia is in the middle of its worst economic crisis since 2008.

The country's economic output declined by 3.7 percent in 2015 and is projected to decrease by a further 1 percent in 2016, according to International Monetary Fund estimates published in January. Inflation soared to 15.4 percent in 2015, compared with 7.8 percent in 2014.

The decline is partly the result of the international sanctions imposed following Russia's annexation of Crimea in March 2014. Large trade and investment partners, including the European Union and the United States, cut off Russia's access to foreign loans and capital markets and froze assets belonging to high-level Russians.

The effects are felt in many regions across the country -- unemployment and poverty have risen significantly in the past year. At the same time, Russia's defense spending remains high, as Moscow continues to be engaged in battles in Ukraine and, most recently, Syria.

The WorldPost spoke with Sergey Aleksashenko, former deputy chairman of the Central Bank of Russia and a nonresident senior fellow at Brookings Institution, about how the economic crisis may affect Russian President Vladimir Putin's popularity ahead of the March 2018 elections, Russia's military ambitions and the country's future place in the international community.

Economic growth in Russia is decreasing for thefirst time since the 2008 global economic crisis. What caused this decline?

The most obvious and the most popular answer to this question is that the decline in the Russian economy was caused by falling oil prices and Western sanctions. Oil, as well as Western financial sanctions, matter a lot.

But the economic decline in Russia started in the very beginning of 2012. The growth rate was only 1.3 percent in 2013, for example, when oil was well above $100 per barrel.

The key problem of the economy, and the key reason for the decline, was the decline in investment. The economy cannot grow without investment. It's like gasoline that you need in your car. While you have gasoline, you go on. When you have no gasoline, even the best car cannot go on.

In 2012, investment stopped growing. In 2014, investment started to decline. That's the main reason why the Russian economy is contracting.

What actions can the Russian government take to tackle the current crisis?

The Russian government cannot influence oil prices. At least, it cannot increase oil prices. Yes, Russia tried to agree with Saudi Arabia to stop growth in production, but that doesn't mean that prices will start to grow immediately.

The Russian government can, theoretically, remove Western sanctions if Putin decides to step back out of Ukraine. But that's unlikely to happen in my view, because Putin is not a person who is ready to give up.

That means that the only one real chance the Russian economy has is if the government improves the investment climate and boosts investment. But in order to do this, Russia needs to implement the rule of law. Once again, that's not in the interest of Putin, because implementing the rule of law is the best way for him to lose power.

What would implementing the rule of law do to Putin, exactly?

In Russia, there is a very specific political regime. Though we have elections, though we have a parliament, all power in the country is in Putin's hands. He oppresses political opposition and does not allow free and fair elections to take place.

The main instrument in preventing free elections is control over the legal system and the judiciary. So, if Putin implements the rule of law, that means he cannot have unfair elections. He has to accept fair elections and that means he may lose the power. That's the mechanism.

Bothpoverty andunemployment have risen in the country in recent months. How will a weakening economy affect Putin's popularity in the country in the run-up to the March 2018 presidential elections?

It is difficult to predict the change in public opinion and public mood. Putin's popularity is, to a great extent, based on the fact that he has no political opponents. There is no political competition and there is no political opposition to him.

When people ask who do you support, there is only Putin. Putin has been in power for 16 years. There is a generation in Russia, when they graduated from high school, Putin was the president. They graduate from university, Putin was the president. They got jobs, Putin was the president. They got kids, and Putin was still the president. So they don't know any other politician, and that is, to a great extent, what his popularity is based upon.

Putin also bought his popularity. He used budgetary money to boost his popularity.

For 10 years before the crisis of 2008, Putin promoted a policy of when he used a big portion of oil revenues from growth prices to increase pensions and wages. And that's why we may say he has specialties for popularity.

So poverty and unemployment won't change the political climate surrounding Putin?

They may change the political climate, but it won't happen in a year, or in two years. It may take a decade, maybe, but it's not a very fast and rapid process.

It's important to note that the Russian economy is not in free fall. It's not like a landslide, like in Venezuela. Polls started to demonstrate somewhere in December and January that people started recognizing that their economic conditions are declining rather fast. Economic troubles, economic problems, living standards, became the top priority issue. But it's only the beginning of the process and even in the economic protests that we saw recently, people very often said, "We have no political demands. We just have economic issues. Please lower taxes, increase wages, increase pensions." But it's not political. It's not against the government, it's not against Putin.

So I would say that economic dissatisfaction, economic unhappiness, will continue to grow, but this will not result in political unrest.

Ibrahim Ebu Leys/Anadolu Agency/Getty Images
Debris is seen following Russian airstrikes in Aleppo, Syria. Despite its economic woes, Putin has pushed on with aggressive military and defense procurement strategies.

Despite a worsening economy, Russia has still increased its 2016 defense budget by 0.8 percent and is continuing its campaign in Syria. What does this say about the country's defense ambitions?

The increase in military budget by 0.8 percent when inflation in the country is 13 percent actually means shrinking of the military budget. I would not pay big attention to the nominal numbers because inflation in Russia is very high.

Nevertheless, military expenditures were definitely the one item in the budget of 2016 that wasn't compressed.

Syria, for Putin, is a way to demonstrate to the whole world ... that Russia is a great power and Russia can do in their foreign affairs whatever Russia wants.

Putin is dreaming about the great military power of the Soviet Union and he wants Russia to be a great military power. That's why he is financing the military procurement program until 2020. (Five years ago, Russia launched the State Armaments Plan, a $700 billion program through which the country aims to increase military procurements by 2020.)

Look, as any politician, you want support from different groups in society, and the military, generals and military complexes, production complexes, are of huge importance of Russia. Putin paid the pensioners, after that the teachers and the doctors, and now he's paying the military.

Many American and European experts believe that the Russian campaign in Syria is an operation to distract attention from the domestic problems. I don't think that's correct. Syria, for Putin, is a way to demonstrate to the whole world, the United States as well, that Russia is a great power and Russia can do in its foreign affairs whatever Russia wants.

What are the long-term consequences for Russia’s place in the international community, politically and economically, if the country’s economic woes continue?

I think that the main, long-term result of the Western sanctions and the confrontation in international affairs for Russia will be the degradation of the economy.

It’s not a secret that Russia needed a lot of Western equipment and Western capital to modernize its economy. Not just money, but technology, know-how, management skills.

If the political risk of doing business in Russia remains high, that means foreign businesses will refrain from going to Russia. And that will keep Russian growth rates low, even if the country recovers from the recession. That’s very low for the emerging economies and that means the share of Russia in the global economy will shrink, and the technological gap between Russia and developed nations will increase.